Light at the end of the tunnel for directors?

Mark Baldwin from our Insolvency Service team looks at the recent decision of Secretary of State for Business, Energy and Industrial Strategy v Steven [2018] EWHC 1331 (Ch), which considered ”a light at the end of the tunnel” defence.

It has long been thought since the decision in Re Structural Concrete Limited [2001] BCC 578 that when a director faces an allegation of trading to the detriment of a specific creditor, normally Her Majesty’s Revenue and Customs (“HMRC”), he cannot run a defence that he believed that one day the company would generate sufficient funds to pay that creditor off. That approach was challenged in the recent case of Secretary of State for Business, Energy and Industrial Strategy v Steven. Mr Steven was a director of three companies which ran three different restaurants, which were placed into liquidation between October 2013 and June 2014.

It was alleged that in all three companies Mr Steven had caused them to trade to the detriment of HMRC.

Mr Steven argued that the businesses failed through no fault of his own and he believed that each could trade out of difficulty and repay their creditors in full.

His Honour Judge Russen QC termed this the “light at the end of the tunnel” plea. He accepted that such an argument might be used as a defence but that “if the period (of trading to the detriment of HMRC) was a lengthy one then it is unlikely that, categorised more generally as an extenuating circumstance founded upon the director’s optimism for the company’s future, the riposte will operate to dispel a finding of unfitness.”

The judge found that Mr Steven had caused the companies to trade to the detriment of the Crown and then went on to consider the extenuating circumstances put forward by Mr Steven. In his evidence, Mr Steven said that in continuing to trade, he reasonably believed that he would pay the outstanding debts by selling the businesses as going concerns. They were sold to connected companies, which assumed some liabilities of the companies, but for modest amounts.

The judge found there were not extenuating circumstances to excuse the misconduct because: -

The periods of trading to the detriment of a particular creditor were between 12 and 14 months, and in respect of two of the companies, comprised most of their period of trading.

In two of the companies, no VAT returns had ever been filed and the VAT due was not quantified.

Mr Steven did not communicate with HMRC as to his belief that the tax liabilities would be satisfied by continued trading.

The periods of non-payment started well before the winter storms in late 2013 and early 2014 which spelled the end for the businesses.

There was too much uncertainty as to whether the decision to continue trading was reasonable or, even if it was reasonable, whether it would deflect from the discriminatory treatment of HMRC.

Mr Steven was disqualified from being a company director for a period of 3 years.

Whilst the decision may give directors a little comfort when faced by allegations of trading to the detriment of a specific creditor it is clear that the light at the end of the tunnel is the merest chink.

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